Share Subscription Agreement (SSA)

A share subscription agreement is basically made between the company and the investor that involves the acquisition of shareholding in the company either by purchase of existing securities or issuance of new shares. The main purpose of share subscription agreement is to have clarity regarding the provision of the SSA and to have an extensive and detailed agreement with the shareholders that specifies the scheme of investment to be made by the potential investor into the company.

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Overview of Share Subscription Agreement (SSA)

Share Subscription Agreement (SSA) is a legal agreement between a company and a potential investor and is basically a promise by a potential investor to invest a pre specified capital amount, in the form of consideration to the Company against issuance of fresh shares at predetermined price. A share subscription agreement must include the number of shares that shall be issued and the order and manner in which the funds will be provided. Under Share Subscription Agreement (SSA) the company wants to issue fresh shares so that the existing shareholders do not dilute their stake in the company.

The subscription agreement presents a potential investor’s intentions to join a limited partnership in a company. Under the subscription agreement, the terms are specified for the company to sell a certain number of shares in return for a predetermined amount from the private investor. The liability of potential investors under the subscription agreement is limited to the investor capital amount.

Advantages of Share Subscription Agreement (SSA)

• Limited Liability Under the subscription agreement, the private investors’ liability is limited to the amount of capital investment. In the case of the company becoming bankrupt, the potential investor cannot be held liable to repay the lenders or any other entity from their personal wealth
• One time-Investment The subscription agreement makes up for a great way to invest a lump sum amount and realise returns as the potential investors are required to invest a pre-specified amount as a one-time investment.
• Investment Growth The subscription agreement allows investors to invest in companies at the early stage of their growth. As businesses may grow to be worth billions, the amount invested by the private investors can multiply by a huge margin with time, allowing them to get high returns on the investment.
• Easier Funding Not every company wants to list on the stock exchange for raising funds as the issue may be unsuccessful based on the company’s present condition. Hence, general partners of the company utilise subscription agreements to raise funds without having to offer the shares to the general public.

Things to Know

Contents of Share Subscription Agreement

• Parties to the agreement
• Definitions & interpretation
• Term of the agreement
• Shareholding pattern
• Subscription to the investor subscription securities
• Conditions precedent
• Closing
• Representations & warranties
• Covenants
• Indemnification
• Termination and default
• Specific performance
• Notices
• Governing law
• Dispute resolution
• Expenses

Major Clauses of Share Subscription Agreement

1. Conditions Precedent: The Condition Precedent Clause is generally contains all the details of the condition to be. It should be exhaustively provided for all approvals, authorizations, permissions and permits which are necessary before and after execution of the transaction, both internal and external and the person responsible for obtaining each of these should also be stated. The conditions precedent clause should also provide for fulfilling all the representations, warranties, obligations, execution of agreements and covenants specified under the agreement
2. Representation and Warranties: Under this clause the subscriber represents about receiving all the relevant information and documents of the Company in which investment is to be made. The subscriber can even provide for meeting the financial commitment and their obligations. The warranty clause is generally a promise made by the by the directors and members of the company that all the information provided from their end is true in every sense and all the information delivered to the potential investor is correct in all aspects.
3. Subscription: This clause shall lay down the number of shares purchased and at what price including the current shareholding of the Company.
4. Right of First Refusal: It is common to include provisions in a shareholders’ agreement to provide that any exiting shareholder must first offer his/her shares to the other remaining shareholders at a certain price. Under ROFR, the Shareholders are restricted from selling their shares to an unrelated third-party without giving an offer to purchase to other Parties to this Agreement.
5. Drag-Along Rights: This clause gives majority Shareholders who want to dispose their shareholding to an unrelated third-party, a right to force the remaining minority shareholders to dispose their shares on pre-determined terms as well
6. Lock In Period: Minimum duration for which the shares are to be held by the investor.
7. Exit Rights: This clause provides for the exit options available in case of breach of terms and conditions
8. Termination: This clause provides for termination by the following ways:

• By the mutual consent of both the parties.
• By the company- if the investor fails to pay for the share subscription on the completion date or if an investor breaches any terms and conditions of the agreement.
• By the investor- if the company fails to provide condition precedent or any breach committed by the company, any adverse change occurs before the completion date.

Any party willing to terminate the agreement on the ground of the clauses mentioned above shall issue a notice to the other party.​

9. Indemnification: Indemnification clause provides for the limits of liability and the process for reimbursement of indemnity claims and is considered as the most scrutinized clause in case of disputes, therefore, attention has to be paid to ensure that the parties is adequately covered in case of issues relating to the transactions emerge. In this clause the parties to the agreement promise to indemnify the other parties against any losses, occurred because of wrong and malafide information in the warranties and representation clause.

10. Dispute Resolution and Arbitration: A share purchase agreement should set out the process for the resolution of any disputes between the parties to the shareholder’s agreement. This could be simply that disputes are referred to the courts under the respective jurisdiction. Alternatively, the Parties can also include the Arbitration Clause in this agreement. Under Arbitration, any dispute that arises between the parties will be referred to an Arbitrator appointed mutually by parties to the agreement. The decision of the Arbitrator will be final and binding on the parties to the Agreement.

Why Companies Next

Share Subscription Agreement is very critical document which defines the Terms of the Capital Investment between the Company and the potential investor, and have long term impact on business of the Company, hence the same need to be carefully drafted by the experts. Companies Next provide online platform to generate well curated Share Subscription Agreement in line with best industry practices, and also provide option to avail customized Share Subscription Agreement. Our team of experts consist of Chartered Accountants, Company Secretaries, and Lawyers who are having rich experience in the field.

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